Why We Are Cutting Our Price Estimate For Sprint To $6

We are cutting our price estimate for Sprint (NYSE:S) from about $8.50 per share to about $6 per share to account for the potentially lower growth prospects, weaker pricing power, and higher CapEx outlays that it could face, after its merger talks with T-Mobile (NASDAQ:TMUS) fell through last month. Below we detail the rationale for our revision and our outlook for Sprint’s stock. Our new $6 price estimate is slightly ahead of the current market price.

Pricing Pressure Could Persist, Sprint Stands To Lose The Most

Although Sprint has been able to post positive postpaid subscriber net adds over the last several quarters, it has come at the cost of aggressive discounting. For instance, the carrier offers the lowest pricing for unlimited postpaid data at $60 for a single line. Moreover, despite this discounting, the carrier has not been able to perform as well as its larger peers. For instance, Sprint added 279k postpaid phone subscribers over the last quarter, while Verizon posted 486k net adds and T-Mobile added 595k subscribers. Its likely that these promotions will have to continue in the near term, impacting margins.

The potential T-Mobile merger falling through means that Sprint would miss out on significant cost synergies ( we estimated the present value of combined synergies after tax at about $20 billion). Moreover, CapEx outlays will also be higher on a relative basis compared to a combined company, as the industry transitions to 5G technology. While Sprint has a sizable high-band spectrum position that could be used to deploy the new wireless standard, infrastructure spending will likely be higher compared to 4G, considering that 5G requires a denser network. This could stress Sprint’s already precarious financial position. The company’s debt load stands at around $38 billion, with close to half that amount coming due over the next four years. The carrier has had to resort to mortgaging assets such as spectrum to bolster its liquidity position and cut interest costs, which come in at around $600 million each quarter.

There Could Be Some Positives

Sprint’s parent company Softbank noted that it planned to increase its stake in the carrier while indicating that it views the company as a critical part of its plans for the U.S. market. Although Softbank already has an 82% stake in the carrier, with regulations limiting its holding to under 85% (without having to make a tender offer for the rest of the shares), Softbank could provide a backstop for Sprint’s debt. There is an outside chance that Sprint could seek an alternative transaction, but the possibilities remain few (Sprint was in talks with cable behemoths Comcast and Charter Communications a few months ago) and Softbank’s apparent interest in maintaining control could also complicate issues while discussing a potential transaction.

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